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Monday, June 1, 2009

The Consumption Tax That Does Make SenseFriday, May 29, 2009By: Ken Hoagland

The recent trial balloon out of perennially cash-hungry Washington testing whether Americans would abide a European style Value Added Tax is suffering the same fate as the doomed Hindenberg. The sooner this idea crashes and burns, the better. The proposed VAT would be added on top of the badly broken income tax, increasing American's tax burden and hiding even more federal taxes from plain sight. Yet another hidden federal tax would take the nation in exactly the wrong direction.

There is, however, a consumption tax that restores the proper relationship between citizen and government, brings about a new era of American economic growth and cuts the Gordian knot of complexity, unfairness and damage to our economy caused by our own tax system. Most significantly, this consumption tax, called the FairTax, reveals the price tag of federal spending to taxpayers picking up the tab. The most compelling virtue of the FairTax, in fact, may be that it turns every consumer in the United States into a "stakeholder" who will finally pressure politicians to limit spending. For this reason and because it strips Congress of the ability to manipulate the tax code for power and profit, the FairTax finds stiff opposition inside Washington and growing support outside the beltway.

Advocates for pending FairTax legislation rail against the destructive effects and corrupted application of the income tax system. They point to trillions of dollars of private investment that are expected to flow into the United States with elimination of corporate and capital gains taxes. They love the idea of illegal immigrants and the entire underground economy joining the tax base. They endorse the idea of an universal monthly "prebate" to offset the tax on the necessities of life which eliminates federal taxes on the poor and provides the middle class with dramatic tax reductions. And they like the idea of a simple, visible tax on consumption that entirely replaces the income tax system, freeing work, savings and investment from the hobbling effect of such taxes.

But it is the medicine for the Achilles heel of our democracy that may prove the most compelling strength of the FairTax. Our Founding Fathers warned that when, in a democracy, the public discovers that it can vote itself wealth from the public treasury, self-government may destroy the economic foundation of the nation. Many would argue that cynically ambitious candidates and elected officials have been buying votes with the public treasury for years.

Top economists across the nation helped design the FairTax and have proved that it can replace all revenues now collected under the income tax system. Under the FairTax, every retail purchase of new goods and services is subject to federal taxation. The tax paid at the cash register is visible, unlike taxes that are now hidden through payroll withholding and embedded within the price of goods and services. The FairTax visibly connects federal spending to earnings. Today, by contrast, massive spending for entitlements, stimulus projects, pet projects and every other government program seems like “free money” to a lot of voters. One need only look at the courting of the powerful senior citizen’s block of voters, or the growth of “earmarks” to understand the siren song of such promises both to elected officials and to the body politic. Neither voters nor politicians have been able to resist spending beyond our means.

The effect is destructive as politicians from both parties have taken us down a path of unsustainable debt. Some economists cite current and obligated future government debt at the local, state and federal level as so large that it threatens the “full faith and credit” of the United States.

Our destructive answer has been to spend even more by borrowing more from foreign creditors—both to assuage public fears and to address real problems. We are now immorally spending the earnings of our children and grandchildren on both the current challenges of our modern society and the politically popular wishes of entrenched interest groups across the political spectrum. The other primary answer from national leaders has been to collect less by legislating tax cuts in the legitimate hope that lower taxes will spur investment. If we were not already in such deep debt, the debate between the two sides might make sense and a rational middle ground might be achieved. But with more than $11 trillion of national debt, a looming Social Security IOU for tens of trillions more and $40-60 trillion of debt at the state and local level, this argument begins to look a lot like zealots endlessly arguing over whether to bake bread or grow wheat while standing in the middle of a long-parched desert.

Under the income tax system our earnings belong first to the federal government with only the remainder belonging to the citizen. Payroll withholding and direct taxation of earnings turns the whole notion of the American citizen as sovereign on its head and creates a nation of citizens--and now their offspring-- working first for our government. The FairTax restores the role of the citizen by insisting that what we earn belongs first to us and only through our consumption decisions is money then provided for the common good. Most significantly, it makes clear to every American the cost of government promises and programs. In this, the FairTax may prove not just a far better tax system but the best way to both strengthen our economy and provide needed medicine to our Republic.

1 comment:

The Fair Tax is a replacement for a questionable income tax. It only makes sense because of the economics when you compared it to income tax. It makes zero sense when you understand that the current implementation of the income tax is a violation of Constitutional protections.

In other words, promotion of the Fair Tax is like saying "Yes, the income tax is wrong, so let's find another way to take their money". Does that make sense? Really?